Money Matters December 16th, 2015

Asia Pacific
The MSCI Pacific Index fell 1.8% last week, vs. a 3.6% decline for the MSCI World.
In a volatile week for global markets, Japan’s Topix held up relatively well, sliding 1.6% as data showed that the Japanese economy did not enter recession in the third quarter, as previously thought. Third-quarter GDP growth was revised up sharply, from an annualised contraction of 0.8% to an annualised expansion of 1.0%, meaning Japan did not suffer the second consecutive quarter of negative growth that would have signalled a technical recession.
The revision was well ahead of expectations, and may be viewed as vindicating the Bank of Japan’s decision not to add to its policy easing measures this autumn. Other data releases in the week were also positive, with machinery orders jumping 10.7% month on month in October, vs. expectations of a small decline, and the Reuters Tankan survey pointing to a solid improvement in manufacturing sentiment in November.
Australia’s mining-heavy All Ordinaries dropped 2.8%, hurt by commodity price weakness and reduced expectations for monetary policy easing after a strong batch of jobs data. The Australian economy added 71,400 jobs in November, well ahead of expectations and following another unexpectedly high reading in October, while the unemployment rate fell 0.1 percentage points to 5.8%.
Hong Kong’s Hang Seng was down 3.5%, while the Singapore Straits Times fell 1.5%.
United States
A further slump in commodity prices weighed on Wall Street stocks in the week to 11 December. The Dow Jones lost 3.3%, while the broad S&P 500 was down 3.8% and the tech-heavy Nasdaq slid 4.1%.
The price of Brent crude, the global oil benchmark, touched a seven-year low of USD 37.76 a barrel, while West Texas Intermediate plunged to USD 35.15. The latest declines came after a meeting of the Organisation of the Petroleum Exporting Countries (Opec) on 4 December, at which the cartel stuck to its policy of not limiting output and failed to set a production target.
With Opec members failing to rein in production to support prices, the burden falls on other oil-producing countries, and particularly on US shale producers, whose shares fell heavily at the beginning of the week. Investors also pulled money out of high yield bond funds amid worries about the ability of energy companies to service their debt.
Cheaper oil benefits the consumer, but may hit the economy in other ways, as producers delay investment and cut jobs. Breakeven levels for the majority of US shale oil producers are between USD 50 and USD 60 a barrel, but many have weathered the prolonged decline in prices relatively well to date thanks to hedging protection. With hedges now rolling off, corporate earnings will suffer and steeper cuts to production may be expected.
Weak Chinese import data added to the pressure on resource prices, as did the upward march of the dollar ahead of the Federal Reserve (Fed) meeting on 15-16 December. Investors now view the first US rate rise in almost a decade as almost inevitable, barring unforeseen events that would deter the Fed from acting.
Last week’s economic data releases provided little to give policymakers pause. Initial jobless claims rose more than expected in the week to 5 December, but the data is typically volatile between the Thanksgiving and New Year holidays. US retail sales climbed by the most in four months in November as the holiday shopping season got underway.
If the Fed moves this week, as anticipated, markets may welcome the clarity at the end of months of speculation. Beyond that, the pace of subsequent rises will be key, with history showing that equity markets tend to perform well in an environment of gradually rising rates, but poorly when rates rise steeply.
European markets fell sharply in the week ending 11 December 2015, hit by a further slump in commodity prices and ongoing disappointment over the European Central Bank’s (ECB’s) policy announcement. The MSCI Europe Index was 4.1% lower.
Sweden’s OMX 30 was among the weakest markets, down 5.7%, hit by stock-specific news as clothing retailer H&M reported poor November sales and Electrolux’s USD 3.3 billion deal to sell its appliances business to General Electric fell through.
The UK’s FTSE 100, which has a heavy weighting in mining and energy stocks, fell 4.6%. Oil producers came under selling pressure as oil prices sank to a seven-year low, while mining giant Anglo American hit sentiment towards the mining sector after announcing it would suspend its dividend and cut around 85,000 jobs worldwide.
The fall in commodity prices is having a significant impact on mining companies, forcing them to cut costs and reign in spending. Investors are also increasingly concerned that the ongoing drop in commodity prices reflects a sharper-than-expected slowdown in global demand, although cheaper fuel and raw material costs should provide a strong boost to consumers and businesses.
Meanwhile, eurozone markets came under pressure following the ECB announcement, with Italy’s FTSE MIB 4.6% lower, Spain’s IBEX 35 falling 4.4%, Germany’s DAX losing 3.8% and the French CAC 40 3.5% lower.
Although the ECB announced earlier this month that it would extend its quantitative easing programme by six months and move its deposit rate further into negative territory, investors had hoped for an increase in monthly asset purchases and possibly a deeper deposit rate cut following dovish speeches from several ECB officials. There was some speculation that the ECB could also move to buy corporate debt as well as sovereign bonds.
The lack of more radical action has been reflected in rising bond yields and particularly in a stronger currency, with the euro now up around 5% against the US dollar since the ECB announcement on 3 December. A stronger currency makes European exports less competitive and imports cheaper, potentially increasing disinflationary pressures. The ECB, in contrast, wants to boost inflation to its target of below, but close to, 2%. The latest annual eurozone inflation rate was just 0.1% in October.
Global Emerging Markets
The MSCI Emerging Markets Index was down 3.1% in the week to 11 December as sentiment was hit by speculation over an impending US interest rate increase and further US dollar strength.
Weak oil and commodity prices hit Russia’s RTS, which was down 4.3%. Brent crude oil prices dropped to a new seven-year low after the Organization of the Petroleum Exporting Countries (Opec) failed to agree to production cuts. Russia is not a member of Opec, but is one of the world’s biggest oil producers, with oil revenues of vital importance for the Russian economy.
Poland’s WIG was down 5.0%, extending recent heavy losses, as investors continued to react negatively to government interference in several state-owned companies and plans to raise taxes on banks and retailers. Companies where the Polish government has a controlling vote at shareholder meetings make up more than 60% of the Polish stock index.
Turkey’s BIST 100 dropped 5.4% as investors weighed the impact of Russian sanctions on the Turkish economy. Tensions with Russia have increased since the Turkish military shot down a Russian warplane along the Turkey/Syria border last month. The main impact so far has been on tourism and food imports, but there are fears Russia could stop the flow of natural gas to Turkey if the conflict escalates.
The MSCI China Index, meanwhile, fell 4.4% amid further fears over slowing economic growth and a weakening currency. At the end of the week the People’s Bank of China indicated it was looking to value the renminbi against a basket of currencies rather than just the US dollar, which may indicate that the Chinese authorities are happy to let the currency weaken further.
Brazil’s BOVESPA outperformed, ending the week just 0.2% lower as stocks were boosted by renewed moves in the Brazilian parliament to impeach President Rousseff. Some investors believe that impeachment could lead to the adoption of market-friendly economic policies and help to pull Brazil out of its prolonged recession.
Bonds & Currency
Investors sought the perceived safety of longer-term government bonds in a turbulent week. The US 10-year Treasury yield fell 9 basis points to 2.14%.
High yield suffered the biggest outflows since August 2014 amid worries over the energy sector and after a large US fund suspended redemptions.
*Source: J.P. Morgan Asset Management


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